Transcript of "Venture Impact 2011 Report"

1.
EDITION 6.0
Venture
Impact
The Economic Importance of
Venture Capital-Backed Companies
to the U.S. Economy

2.
About IHS Global Insight
IHS (NYSE: IHS) is the leading source of information and insight
in critical areas that shape today’s business landscape, including
energy and power; design and supply chain; defense, risk and
security; environmental health and safety (EHS) and sustainability;
country and industry forecasting; and commodities, pricing and
cost. Businesses and governments around the globe rely on the
comprehensive content, expert independent analysis and flexible
delivery methods of IHS to make high-impact decisions and
develop strategies with speed and confidence. IHS has been in
business since 1959 and became a publicly traded company on the
New York Stock Exchange in 2005. Headquartered in Englewood,
Colorado, USA, IHS employs approximately 4,400 people in more
than 30 countries around the world.
Content: National Venture Capital Association
Design: Frost Miller Group
Copy: Michael Kooi
ISBN: 0-9785015-9-4
Copyright 2011 by the National Venture Capital Association.
All rights reserved. No part of this work covered by the copyrights
hereon may be reproduced or copied in any form or by any means
(graphic, electronic, or mechanical, including photocopying, recording,
taping, or information storage and retrieval systems) without the
written permission from the National Venture Capital Association.
Every reasonable effort has been made to assure the accuracy of
the information in this publication. However, the contents of this
publication are subject to changes, updates, omissions, and errors.
The National Venture Capital Association does not accept any liability
for inaccuracies that may occur.

3.
Introduction
Mark Heesen
President
National Venture
Capital Association
For a decade now, NVCA has used data collected by IHS
Global Insight to tell the story of venture capital’s outsized
impact on U.S. job creation and economic growth. I am
pleased to report that this sixth edition of Venture Impact
only reinforces the narrative. The percentage of total U.S.
private sector employment generated by venture capitalbacked companies (past and present) grew from 2008, as did
their percentage of overall U.S. revenue.
That this increase occurred amid one of the toughest
recessions in U.S. history speaks volumes about venture
capital’s importance to our economy — both today and for
the future. Even so, the numbers within this report tell only
one part of the story.
Venture capital’s role in driving U.S. innovation tells us
more. No other investors assume more risk, employ more
patience or partner more closely with entrepreneurs to bring
breakthrough ideas and technologies to the marketplace.
Over the last four decades, these products have changed the
way we live and work in profound and countless ways.
Moreover, such innovations drive the U.S. economy’s
evolution by spawning new high-growth companies and, in
many cases, entire new industries. Here, venture capitalists
play a lead role by persistently identifying and funding only
those ideas with this transformative potential — in good
economic times and bad. Venture has proven itself to be the
most effective mechanism for rapidly deploying capital to
the most promising emerging technologies and industries
— moving nimbly to where the future opportunities lie. The
result has been millions of jobs, trillions of dollars in revenue,
and immeasurable economic value that otherwise might
never have come into being had these bright ideas not been
initially funded and nurtured to sustainability.
That’s why we must continue to recognize this aspect of
venture capital’s impact when we tackle critical economic
and public policy issues. If we do, I believe the U.S. venture
capital community will continue to drive our economy
toward a more prosperous tomorrow.
Mark Heesen
President, National Venture Capital Association
Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
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6.
Venture Capital Grows
U.S. Jobs and Revenues
14
12
10
4
8.69
11.68
12.36
11.0%
12
10
11.87
8
9.37
6
6
4
2
2
0
2000
2003
2006
VC-Backed Company Jobs
2008
2010
0
% of U.S. Private Employment
U.S. Venture-Backed Company Revenue
2000 – 2010
3.5
19.7%
Trillions of Revenue
3.0
2.5
14.9%
15%
$2.64
20.8%
21%
$2.99
$3.08
1.0
$1.49
10
$1.67
5
0.5
0
20
15
2.0
1.5
25
2000
2003
2006
VC-Backed Company Revenue
Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
2008
2010
% of U.S. GDP
0
% of U.S. GDP
Looking forward, venture capital’s impact
on the U.S. economy will likely grow even
larger. That’s because many of the fastest
growing venture-backed companies in the
U.S. today have yet to go public. IHS Global
Insight research suggests that 92 percent
of job growth for young companies occurs
after their initial public offerings. This fact
underscores the importance of America’s
IPO market and of ensuring that our most
innovative young companies can access the
capital they need to grow.
8
7.8%
8.6%
10.8%
4
While total employment and revenue for
venture-backed companies contracted during
the 2008-2010 downturn, both did so at lower
rates than in the larger U.S. economy. As a
result, venture-backed companies actually
increased their percentage shares of total
U.S. activity in both categories.
This ability of VC-backed companies to
outperform their non-venture counterparts
— during good times and bad — flows
from venture capital’s focus on highly
innovative, emerging growth companies. The
500 largest public companies with venture
roots increased their collective market
capitalization by approximately $700 billion,
rising from $2.1 trillion in 2008 to $2.8 trillion
in 2010.
10.2%
% of U.S. Private Employment
While investment in venture-backed
companies only equates to between 0.1
percent and 0.2 percent of U.S. gross
domestic product each year, these
companies employed 11 percent of the total
U.S. private sector workforce and generated
revenue equal to 21 percent of U.S. GDP.
U.S. Venture-Backed Company Employment
2000 – 2010
Millions of Jobs
The venture capital
community’s positive impact
on the U.S. economy far
outweighs its relative size.

10.
Venture Capital Drives
the Hi-Tech Sector
VC-backed companies keep growing faster than
their peers — even after their venture investors exit.
Over the past half century, venture-backed innovations have consistently
spawned not only life-changing technologies but entire new industries.
These include semiconductors, the Internet, biotechnology, medical
devices and clean technology, which in turn have spawned exciting
subsectors of their own (pp.6-7). Such evolutions create virtuous circles
of innovation, job creation and revenue growth that benefit all Americans.
Venture-backed companies typically go on to fuel these new industries
in terms of employment and revenue share. With their focus on
innovation, high-growth potential and entrepreneurial spirit, these
companies set themselves on a unique, positive trajectory that
prevails long after the venture capitalist exits the investment.
The recession of 2008 saw employment losses nationally, but less
so with venture-backed companies. From 2008 to 2010, as U.S.
private sector employment fell 2.6 percent, venture-backed company
employment fell by only 2.0 percent — 23 percent less than the
overall decline. In terms of revenue compound annual growth rate,
while total U.S. sales fell 1.4 percent, venture-backed company
revenue grew at 1.5 percent and VC-backed companies outperformed
their overall industries in 12 of 16 sectors from 2008 to 2010.
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Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

13.
Venture capitalists do this by providing the funding and guidance — and
by assuming the risks — necessary for building high-growth companies
capable of bringing these innovations to the marketplace.
Many venture capitalists come to the industry
part of this process, the venture capitalist also
after successful careers as scientists, engineers,
guides the company through multiple rounds
doctors or entrepreneurs. Working through tight-
of financing. At each point, the company must
knit firms, they raise money from pension funds,
meet certain milestones to receive fresh funds
endowments, foundations and high-net-worth
for continued growth. If the company fails to
individuals to form a venture fund. This fund
meet these goals, the VC’s responsibility to his
is then invested in the most promising startup
investors may require him to walk away.
companies (which become part of the VC’s
“portfolio”), typically over the course of 10 years.
The VC’s goal is to grow the company to a
point where it can go public or be acquired
VCs focus exclusively on companies developing
by a larger corporation (called an “exit”) at a
significant innovations — be it a new piece of
price that far exceeds the amount of capital
software, a life-saving cancer drug, or a new
invested. Approximately one-third of portfolio
model for consumer sales. Unless the company
companies fail, so those that do succeed must
is poised for significant growth, a VC won’t
do so in a big way. Typically, when a venture-
invest. Making investments at the earliest
backed company exits the portfolio, the VC
stages of a company’s development — often
distributes the profits to the fund’s investors
before a product or service is more than just
and eventually leaves the portfolio company’s
an idea — involves significant entrepreneurial
board of directors. Once all the investments
risk, which severely limits capital sources for
of a particular fund have been exited and the
such companies. Yet, venture capitalists assume
proceeds have been distributed, the fund
this risk alongside the company founders by
ends. In many cases, however, the institutional
providing capital in exchange for an equity stake
investors reinvest these earnings in a new
in the company.
crop of funds and the process begins anew.
During this investment stage, a venture
These elements — the patience, the hands-
capitalist provides more than just money to
on guidance, the willingness to take on risk
the company. Typically, the VC takes a seat on
and fail — make venture capital unique as an
the board of directors and participates actively
asset class and enable it to drive U.S. economic
in company operations. This commitment
growth faster and generate more jobs than
often includes providing strategic counsel
other asset classes. Historically it has helped set
regarding development and production, making
the U.S. economy apart from our international
connections to aid sales and marketing efforts,
competitors.
and assisting in hiring key management. As
Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
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14.
The Characteristics of Successful
Regional VC Ecosystems
Most venture capital hubs start
with a steady flow of early stage
innovations — often generated
by scientists or entrepreneurs at
top-flight research universities,
government laboratories or
existing startups.
The presence of at least one established,
innovative, venture-backed anchor company
that draws talent to the area (e.g. Dell in Austin
Top 5 States for U.S. VC-Backed
Company Employment
RANK
STATE
VC-BACKED COMPANY
EMPLOYMENT
1
California
2,887,063
2
Texas
1,129,551
3
Pennsylvania
783,527
4
Washington
778,579
5
Massachusetts
775,151
or Medtronic in Minneapolis) and spins out
entrepreneurs also helps seed the ecosystem.
In addition to capital, these entrepreneurs need
ongoing counsel from lawyers, accountants
and other business professionals to get their
ideas off the ground. Such support networks
build up over time and provide startups
and VCs with specialized services such as
intellectual property protection, IPO registration
compliance and human resources support.
Top 5 States for U.S. VC-Backed
Company Revenue
Encouragement from state and local
government in the forms of favorable tax
RANK
STATE
and investment policies, common-sense
regulatory structures and funding of basic
VC-BACKED
COMPANY REVENUE
1
California
$845,601,000
2
Washington
$256,081,000
scene, completes the system.
3
Texas
$242,608,000
By assembling and pursuing these elements
4
Pennsylvania
$238,383,000
5
Massachusetts
$189,722,000
research provide a third essential component.
Healthy infrastructure, which includes a strong
transportation network, affordable housing,
high-quality schools and a robust cultural
smartly, states and regions can establish
favorable environments for venture-backed
companies to grow and contribute to the local
economy in meaningful ways.
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Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

15.
Methodology
IHS Global Insight created a database
comprised of 23,623 venture capital-backed
firms. This database, created from four
unique databases, measures venture-backed
employment and sales revenue across
states and industries for the 2008 to 2010
period. The previous update in 2009 used
the 2009 Venture Capital Database. From
this catalog, the top 500 companies in terms
of 2008 revenue were identified. Revised
2008 employment and revenue estimates
were updated as available. Current 2010
employment and revenue estimates were
entered into the database as available for
the Top 500 companies as well. For the
remainder of the companies in the database,
2010 employment and revenue figures were
projected using industry growth rates. Every
company in the database is assigned a
MoneyTree and a VEIC code which IHS Global
Insight mapped to a specific North American
Industry Classification Code System (NAICS)
code. Using IHS Global Insight’s Business
Market Insights1, sales and employment
growth figures for the 2008 to 2010 period
were estimated. These growth rates were
applied to the 2008 sales and employment
observations to obtain estimated 2010
employment and sales.
Three databases were subsequently added
to the 2009 Venture Capital Database to
generate the current database consisting
of 23,623 venture capital-backed firms.
The databases consisted of companies
that offered IPOs, received venture capitalbacked investment funds, or were part of
mergers or acquisitions during the January
1, 2009 to February 14, 2011 period. For
all of the companies investigated in these
three databases, 2008 and 2010 sales
and employment numbers were entered
as available. Careful cross-checking and
research were conducted across all four
databases to avoid redundancy.
Venture-backed companies which were
acquired were reviewed further. To ensure
proper counting, if a venture-backed
company was acquired by another venturebacked company it was removed from the
database because its jobs and revenue were
already included in those of the acquirer. If
an acquirer was not venture-backed, if the
acquired companies comprised more than
50 percent of the acquirer, it was prorated. If
the acquired company comprised less than
50 percent of the acquirer, the company
was deleted from the database. While this
likely understates the totals, no obvious
methodology was identified to track these
minority components going forward.
1. IHS Global Insight’s Business Market Insights provides historical and forecast data projections for nominal sales,
real sales, employment, and establishments at the national, state, and metro geographies for six-digit NAICS codes.

16.
About NVCA
Venture capitalists are committed to funding America’s most innovative entrepreneurs, working closely with
them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic
growth. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA)
empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation
and reward long-term investment. As the venture community’s preeminent trade association, NVCA serves as the
definitive resource for venture capital data and unites its 400-plus members through a full range of professional
services. For more information about the NVCA, please visit www.nvca.org.
1655 Fort Myer Drive
/ Suite 850 / Arlington, Virginia 22209 / T: 703.524.2549 / F: 703.524.3940 / www.nvca.org